US ethanol to shrink to 25 firms in 10 years - consultant

16 June 2010 17:28[Source: ICIS news]

ST. LOUIS, Missouri (ICIS news)--The US ethanol industry faces a major period of consolidation in the next 10 years that will compress the number of companies operating in the sector to around 25, a consultant predicted on Wednesday.

"We are poised for a pretty dramatic reduction in the number of producers in the ethanol business," said Mark Lakers, president of Agribusiness & Food Associates.

Lakers did not give an estimate of how many entities currently operate in the US sector.

According to Renewable Fuels Association data, there were 187 plants in operation in the US at the start of this year, as well as some others that have been idled. Many of the plants are owned by small companies set up by farming co-operatives.

Most ethanol producers in the US have been operating without profits since the severe downturn in producer margins in 2008, Lakers told the annual Fuel Ethanol Workshop in St. Louis, Missouri.

At best, the top 30% of plants were making up to 15 cents/gal, while the next 40% were at the break-even point and the bottom 30% were losing as much as 15 cents/gal, he said.

Lakers likened the situation to the shake-out in the US swine industry in the 1990s.

"Wall Street showed up, investment led to overproduction, then the industry collapsed," he said.

The likeliest survivors in the ethanol consolidation would be integrated firms that have other revenue streams and contracted marketing plans that reduce margin volatility, he said.

Integrated firms also have better access to capital than pure ethanol companies, which were struggling to access credit in the current banking climate.

"The only relief we are seeing right is foreign banks coming to the US that have less regulation and more capital than US banks," Lakers said.

Given the likelihood that the weakest producers will not survive anyway, operators should consider getting out of the business now rather than waiting until they find their low point, he said.